Section 44C of Income Tax Act, 1961 Deduction of head office expenditure in case of Non-residents

Section 44C of Income Tax Act, 1961 Deduction of head office expenditure in case of Non-residents

Overview of Section 44C

In case of a Non-resident assessee, which operates directly in India, and has a branch office or other presence, which constitutes a Permanent Establishment (“PE”), of the Non-resident assessee in India, the head office may incur certain expenditures in relation to the Indian PE. In addition to this, certain general expenses which are incurred by the Head Office, may also be related to the Indian PE, but cannot be identified specifically.

In order to prevent foreign companies charging higher expenditure to the Indian branch, Section 44C was introduced by the Finance Act 1976, effective from June 1, 1976.

Meaning of Head office Expenditure

Head office expenditure” means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of

(a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession;

(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India;

(c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and

(d) such other matters connected with executive and general administration as may be prescribed

Applicability of Section 44C

Section 44C is applicable where

> The taxpayer is a non-resident as per the provisions of the Income Tax Act, 1961.

> The non-resident must have a business or profession in India.

> The head office expenditure must be incurred outside India and attributable to the Indian business or profession.

Exemptions from Section 44C

Firstly it is for the Non-Resident so it will not applicable on All Residents

> Section 44C does not apply to non-residents who are individuals or HUFs.

> It also does not apply to non-residents who do not have a permanent establishment in India.

> The section is not applicable if the non-resident’s income is taxable under the presumptive taxation scheme under Section 44B, 44BB, 44BBA, or 44BBB.

Limit for Deduction u/s 44C

Section 44C restricts the claim of head office expenditure to

> 5% of “adjusted total income” in case of profit, or in case of loss, 5% of the average adjusted total income ;

> Head office expenditure incurred by the assessee, as is attributable to the business or profession of the assessee in India.

Lower of above will be deducted as expenditure.

What is Adjusted Total Income

Adjusted Total Income refers to the total income of the assessee, computed in accordance with the provisions of the Act without giving effect to the following :

> Allowance under Section 44C of Income Tax Act for Head office expenditure

> Unabsorbed depreciation u/s 32(2)

> Development rebate & allowance under section 33 and 33A respectively

> Family planning Expenditure incurred by a company under first proviso to section 36(1)(ix)

> Brought forward Business loss under section 72(1)

> Brought forward Speculation loss under section 73(2)

> Loss under the head Capital Gain under sub section (1) or sub section (3) of section 74

> Brought forward Loss from certain specified sources under Section 74A(3)

> Deductions under Chapter VI-A

Average Adjusted Total Income

> When there is a loss in the current year then the Average adjusted total income is calculated. The adjusted total income of the assessee shall be computed based on, whether the foreign company was assessable to tax for one, two or three preceding years.

> When the total income of the assessee, was assessable for each of the three preceding assessment years, one third of the “aggregate amount of the adjusted total income” in respect of previous years relevant to those three assessment years.

> As stated above, Average Adjusted Total Income is derived by taking the simple average of the year assessable out of the three prior assessment years.

General Implications

> Disputes occur over the requirement to maintain books of accounts and get them audited if the non-resident claims a deduction other than the 5% presumptive limit.

> The non-resident entity bears the burden of proving the appropriateness of the head office expenditure claim.

> Proper documentation and compliance are crucial to avoid disputes and ensure accurate tax computations.

> The expenditure which is covered by section 44C is of a common nature only, Expenses that are Not directly attributable to the any branch are claimed for deduction under the aforesaid section

> Expenses that are directly attributable to the Indian branch or incurred for rendering services in India are fully deductible. These expenses are not subject to the provisions of Section 44C and can be claimed as deductions

Analysis & Conclusion

> Section 44C of the Income Tax Act in India addresses the deduction of head office expenses for non-resident assessee’s . If the costs are exclusively expanded for the Indian branches it is not deductible under this clause.

> Section 44C gives a reasonable deduction for head office expenditure so that head office cannot charge excess claim of expenditure to Indian branch, so balancing the interests of non-resident taxpayers and the government.

> Maintaining accurate books of accounts and getting them audited is essential to support head office expenditure claims. Its practical implications and future considerations highlights the need for non-residents to carefully evaluate their tax positions and seek professional advice when necessary.

Authors:
Shivam Dubey | Article Assistant  
Gaurav Siroya| Partner  
Email: [email protected]